Future financial security is never too early to start discussing various investment options for retirement planning in today’s society. While there are many choices available, government-backed retirement plans are often consider more secure.
Three popular options for investment are the Voluntary Provident Fund (VPF), Employee Provident Fund (EPF), and Public Provident Fund (PPF).
Each plan has its own withdrawal rules, eligibility criteria, and risk factors.
By understanding the details and aligning them with your financial goals, you can identify which scheme is more suitable for your needs.
What is Employees’ Provident Fund?
Employee Provident Fund (EPF) is a government-backed retirement savings scheme available to salaried employees in India.
EPF is manage and regulate by the Employees’ Provident Fund Organization (EPFO), which is under the Ministry of Labour and Employment.
Under the EPF scheme, both the employer and the employee contribute a fix percentage of the employee’s basic salary and dearness allowance to the fund.
The current contribution rate is 12% of the employee’s basic salary and dearness allowance.
The contributions are deduct from the employee’s salary on a monthly basis.
Companies with more than 20 employees have to mandatorily comply with the Employee Provident Fund (EPF) schemes of the government.
The funds accumulate in the EPF account earn a specified rate of interest, which is determine by the government each year.
The interest is compounded annually and is tax-free.
The EPF scheme aims to provide financial security and retirement benefits to employees by building a corpus over their working years.
EPF not only serves as a retirement savings tool but also offers other benefits such as partial withdrawals for specific purposes like purchasing a house, medical emergencies, or education.
Additionally, the EPF scheme provides life insurance and disability insurance coverage to employees.
After retirement, the employee can withdraw the accumulate funds from the EPF account.
Alternatively, they can choose to receive a monthly pension (known as the Employees’ Pension Scheme) if they have complete a minimum number of years of service.
What is Public Provident Fund?
Public Provident Fund (PPF) is government’s long-term savings scheme offer specifically through authorise banks and post offices.
PPF is design to encourage individuals to save for their retirement and build a financial cushion for the future.
PPF operates as an individual account where an individual can open and maintain only one PPF account in their name.
The account has a lock-in period of 15 years, which means the funds deposit cannot be withdrawn fully until the completion of this period.
So, partial withdrawals are allow from the 7th year onwards with certain conditions
Contributions made to the PPF account are eligible for tax benefits under Section 80C of the Income Tax Act.
The minimum annual contribution require is Rs 500 and the maximum limit is Rs 1.5 lakh per financial year.
The interest earn on PPF deposits is determine by the government and is currently tax-free.
And interest rate for PPF is set by the government on a quarterly basis and is usually higher than other fix-income savings options.
The interest is compounded annually, and the accumulate balance grows over time.
The PPF account can be extend beyond the initial 15-year period in blocks of 5 years.
The rate of interest currently stands at 7.1%.
What is Voluntary Provident Fund?
The Voluntary Provident Fund (VPF) is an extension of the Employee Provident Fund (EPF) scheme.
VPF is available to salaried employees already contributing to their EPF accounts.
VPF allows employees to voluntarily contribute a higher percentage of their salary towards their EPF savings.
And EPF contributions are mandatory and have a fix rate of 12% of the employee’s basic salary and dearness allowance, VPF allows employees to contribute an additional amount voluntarily.
The employee can choose the percentage of their salary they wish to contribute as VPF, subject to certain limits.
It is important to note that VPF contributions are subject to the same withdrawal rules and regulations as EPF.
The accumulated funds in the VPF account can be withdrawn upon retirement or under specific circumstances such as resignation, unemployment, or financial emergencies, as per the EPF withdrawal rules.
VPF is a voluntary savings option for EPF contributors who wish to enhance their retirement corpus by increasing their contribution percentage.
It allows individuals to have greater control over their savings and build a larger fund for their post-employment years.
Which is more suitable for you? | RRD’s Opinion
If you are a salaried employee you might already be contributing to the EPF, so, those who are looking at increasing their retirement savings can contribute more through the VPF scheme or choose PPF separately.
The decision depends on the individual’s investment and return expectations.
The rate of return for VPF is 8.5% and for PPF its 7.1%.